The Thing That Ate AgricultureMega-mergers are creating a seamless food system
that leaves no openings for competition, accountability
or independent family farmersby Brian DeVore
White Bear Lake, Minnesota

Young pigs feed on the Perry family farm near Chillicothe, Missouri. Photo by Nic Paget-Clarke.

It's a frustrating task tracking changes in agribusiness these days. Just ask William Heffernan, a University of Missouri rural sociologist who has long documented mergers, buy-outs and joint ventures in our food system. On March 4, he displayed a chart at the St. Charles Community Center in southeast Minnesota.

It showed how four pork packers control 57 percent of the hog slaughter in this country. Number one was Smithfield Foods, number two IBP, number three ConAgra and number four Cargill. It also showed the four biggest hog producers in order of production size: Murphy Family Farms, Carroll's Foods, Continental Grain and Smithfield Foods. This was part of a report Heffernan presented to members of the U.S. Congress a few weeks before.

"Well folks, we're already out of date. These figures are wrong," said Heffernan bluntly to the farmers and other rural residents gathered. Just a few days prior, it was announced that Smithfield Foods was buying out Carroll's Foods, Inc., up until then a key supplier to Smithfield's packing plants. In one fell swoop, Smithfield had become the largest producer and packer of pork in the world. It was as if General Motors had bought out Ford and U.S. Steel and Firestone.

"We can't even keep up on this," conceded Heffernan with a I-don't-know-whether-to-laugh-or-cry kind of chuckle. "A month later, it's out of date already."

Feeding Frenzy

The good professor can be forgiven for being a step or two behind the times. Agribusiness is morphing into a handful of mega-corporations at an unprecedented rate. Consolidations have been building up a head of steam for the past 12 months, with much of it culminating this fall and winter in a frenzy that shows no signs of. One estimate is that there was $3.5 trillion worth of agricultural merger activity in 1998 alone, double the rate of the year before. So far, 1999 is shaping up to be the biggest consolidation year yet. Besides Smithfield's buyout of Carroll's, Cargill, the largest privately held company in the world, has announced it is buying out a major competitor, Continental Grain Company. The acquisition, pending approval by the U.S. Justice Department, will make Cargill the single biggest exporter of grain in this country. And in mid-March, agri-chemical giant DuPont announced it had paid $7.7 billion for the 80 percent of Pioneer Hi-Bred International Inc. that it didn't already own. Pioneer is the largest seed company in the world.

According to the economic literature, it is no longer a competitive situation when four businesses control 40 percent or more of the marketplace. Based on this, most sectors of agribusiness have already bypassed "Go" on the Monopoly board. According to Heffernan's research, beef packing, pork packing, broiler production and many aspects of field crop processing are past what he calls the "CR4" threshold. It's affecting both the supply side - chemicals, fertilizers, seed, implements, credit - and the market side - grain, meat, produce, transportation, processing - of agriculture. Caught in the middle of all this are the hundreds of thousands of independent family farmers who are finding there are fewer places to sell their production or buy their inputs. On the other end of the spectrum are consumers, who are receiving their food through a system that is less accountable to them in terms of price, quality or method of production.

Fewer Players On the Field

Smithfield, Cargill and DuPont are examples of mega-companies that have accomplished consolidation through outright purchase of a major competitor that's pretty much in the same business as they are. But consolidation is taking many other forms as well: "joint ventures," "mergers," "partnerships," "integration," "operating agreements" and similar terms are being used to describe a variety of business arrangements that result in the same final product: fewer players making decisions in agriculture.

"The consolidation is not just a Cargill-Continental type merger," says Bob Taylor, an agricultural economist at Auburn University in Alabama. "It's all these other partial ownerships, joint agreements, etc., that are affecting the system. When you put all that together with the mergers that are up front, you end up with a picture that's not very pretty."

Consolidation in agriculture has always been a fact of life. But this recent spate of lumping is breathtaking in its size and scope. The Cargills of the world aren't just buying out the "little guys" in the marketplace (although they're doing that at a record pace as well), they're also taking over their biggest competitors. When Smithfield bought out Carroll's Foods, Smithfield's chief executive officer bragged to the media that this one single deal would triple the company's level of vertical integration: ability to control the pork industry from the pig's genetics on up to the consumer's table. This one transaction, said the CEO, accomplished what would normally have taken five to 10 years to complete through growth and smaller acquisitions.

Another characteristic of these recent mergers is they are jumping traditional enterprise barriers. It's perhaps no surprise Cargill is buying out a fellow grain trader. But, as the DuPont buyout of Pioneer shows, mergers involving everything from chemicals to seeds to pharmaceuticals to gene-splicing technology are increasingly common.

Why Now?

In some ways, agriculture is just catching up with the rest of the business world, which has been consolidating at a record pace for the past several years. But the food-system's merger mania has been fueled within the past few years by the desire of companies to have a presence in the new global economy. Such a presence requires money, lots of it. It costs much more to maintain a grain terminal in China than a few elevators on the Mississippi River. And within the past 12 months, consolidation has been turbocharged by the desire on the part of agribusiness to enter the biotechnology field in a big way. DuPont's purchase of Pioneer will make it a heavyweight in agricultural biotechnology. Last summer, the proposed merger of Monsanto and American Home Products would have created the largest "life sciences" company on the world (it later fell through). Biotechnology has been touted as the future of agriculture for more than a decade now, but so far all it has produced is a binful of bankrupt companies, an indication of the high financial risk associated with this endeavor. The result is that individual companies have had to team up to attract the kind of Wall Street capital a $500,000 genetically engineered cow requires.

Survival of the Biggest

In February, Mark Drabenstott, an economist with the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City, told the U.S. Senate Agriculture Committee that consolidation was a positive trend that leads to lower-priced, higher-quality food for consumers. Agribusinesses also argue that creating bigger, well-resourced companies provide farmers with better services. Bigger elevators can unload a wagonload of corn faster and provide access to the latest futures trading contracts.

Based on pure expense of doing business in a global, high-tech marketplace, consolidation does make sense: there is simply no other way to pile up so much cash in one place. But when examined from an efficiency point of view, the arguments start to fall apart, says rural sociologist Heffernan, who recently produced a report on consolidation for the National Farmers Union. He likens the current situation to an hourglass, with lots of farmers producing food on top, very few processors in the middle, and lots of consumers at the bottom. That bottleneck in the middle gives agribusiness entities an inordinate amount of control over what food is produced, what farmers receive for it, and what it is sold for. In most sectors of the food system a competitive market has been eliminated, so the traditional rules of efficiency no longer apply.

"In a system that lacks a competitive market, survival depends on power, efficiency has little to do with it," says Heffernan.

Southwest Minnesota crop and livestock farmer Rodney Skalbeck agrees: "We can compete with the corporations, but we cannot market with them."

And that bottleneck isn't helping consumers. Taylor says that between 1984 and 1997, the price of a market basket of food (adjusted for inflation) rose by 2.8 percent. That's not a significant increase, but it's certainly not a drop. During that same period, the amount the farmer received for that food dropped by at least 35.7 percent. The rate of return on equity during the 1990s has been 18 percent for retail food chains and 17.2 percent for food processors. Farming's return on equity averaged 4.5 percent during that same period. That lack of connection between what farmers were getting paid and the price of food became painfully clear this winter, when hog prices dropped to record lows, while the price of a pork chop in the supermarket meat case remained steady.

Agribusiness explains the decline in farmer returns and the failure of food prices to drop in terms of "increased services" offered to farmers and consumers: specialty cuts of meat, more packaging, etc. But Taylor doesn't believe those costs can come close to explaining the huge chasm between the real price of food and agribusiness profits. He points to a study that was presented at the 1998 meeting of the American Agricultural Economics Association. The paper, done by Al-Amin Ussif and David Lambert, found that all 47 sub-sectors of the U.S. food industry that they analyzed had some degree of market control in both the input and output side of the equation.

Cluster Bombs

If taken to its ultimate conclusion, what will our consolidated food system look like? Heffernan and his colleagues predict the formation of four or five food "clusters." These are seamless systems that control food from, - take your pick of colorful description - seed to shelf, field to fork, dirt to dinner plate.

"In a food chain cluster, the food product is passed along from stage to stage, but ownership never changes and neither does the location of the decision-making," says Heffernan. "The farmer becomes a grower, providing the labor and often some of the capital, but never owning the product as it moves through the food system and never making the major management decisions."

Farmers will be employees, or "bio-servants" in a new type of agricultural feudalism. Consumers will not only have no idea what the financial cost was to raise that corn that went into that milk that produced that ice cream; this seamless system will also deny them any knowledge of the environmental and social costs of raising that commodity.

ConAgra is the model for how to create an impenetrable cluster. This company is quickly taking control of every link in the food chain. Its United Agri Products business is a leading distributor of crop chemicals, fertilizers and seeds in North America, Mexico, Chile and the United Kingdom. This enterprise is also a leader in the distribution of biotechnology products, including seeds. ConAgra owns about 100 elevators and 1,000 barges and 2,000 railroad cars. The company produces its own livestock feed and ranks third in cattle feeding and second in cattle slaughtering. In 1998, it ranked third in pork processing and fifth in broiler production and processing.

That chain remains unbroken all the way down to the level of the grocery store. Behind Philip Morris, ConAgra is the second largest food processor in the U.S. Its labeled food items include Butterball, Healthy Choice, Peter Pan Peanut Butter, Hunt's. How did it gain so much control? In 1998, ConAgra was able to report it had acquired or created joint ventures with approximately 150 companies during the preceding 10 years.

No Sleight of Hand

Despite such stark statistics, government seems unwilling to do anything, even though there are plenty of laws on the books that address this issue, in particular the Packers and Stockyards Act of 1921. Passages from that law were quoted frequently on April 18, when more than 800 farmers from 12 states met with Joel Klein and Michael Dunn near the stockyards in South Saint Paul, Minn. Klein, as head of the Justice Department's antitrust division, has made a name for himself for taking on Microsoft. Can Klein make the jump from computer chips to cow chips? It's not looking good. Despite hours of legal, economic and highly personal testimony about the effects of agricultural consolidation, he declined to commit to any concrete action. His colleague at USDA wasn't much more forthright.

"We pledge to you we do everything within our resources," Dunn told the angry farmers meekly.

Perhaps no one should be surprised. Bill Clinton is tight with poultry giant Tyson Foods, and has been very reluctant to ruffle the feathers of agribusiness interests who like the way things are headed just fine. But the argument that this is all part of some inevitable Adam Smith-like agricultural trend is wearing thin in rural America these days.

"This was not put in place by an invisible hand," Hefferan told Klein and Dunn on April 18. "It was put in place by people, and it can be changed by people."

Brian DeVore is editor of the Land Stewardship Letter, which is published by the Minnesota-based Land Stewardship Project, a private, nonprofit organization dedicated to fostering an ethic of stewardship for farmland and to promoting sustainable agriculture. DeVore has written about agriculture for Sierra, Whole Earth, Successful Farming, the Des Moines Register and Farm Futures. He was born and raised on a southwest Iowa crop and livestock farm, and served as a Peace Corps volunteer in Lesotho.